Life Settlements Require A Complete Underwriting Workup
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The concept of a life settlement is receiving more notice in the life insurance industry. Some major insurers are even providing financial support to companies engaged in this new market. This article looks at how the settlements are underwritten and why.
Life settlement is a euphemism for the purchase of an in-force life insurance policy by a third party that has no insurable interest in the insureds life.
It is an outgrowth of the viatical businesses of the 1980s and 1990s. The viatical companies bought life policies from the terminally ill, such as AIDS patients.
Life settlements differ from viaticals in a key way: The life settlement company buys policies from insureds who may not have a significant medical condition but who are usually in their retirement years and who may benefit in several ways from the sale of a life insurance policy they no longer need.
Changes in circumstance, such as a decline in estate values, can result in the need for less estate coverage. Or, the sale of a business can negate the need for a buy/sell policy. Until life settlements were introduced, an insured faced with these situations had only two options to avoid continuing the now not needed coverage: either surrender or lapse the insurance. Now, however, they have another option–sell the policy.
This third option has appeal to older clients. Retirees, for example, may need more financial resources than allowed for in their current retirement plan. That will become an increasingly important issue, because baby boomers are within striking distance of retirement, and projections are that the age 65 and older population will increase by 76% in the next 20 years.
Life settlements also provide new opportunities and challenges for the companies that buy the policies. For example, the seller frequently will have owned the policy for 10 to 20 years before considering offering it for sale. The settlement company doesnt have access to the original underwriting and must rely on the policy itself to determine how it was issued. The settlement company also needs to determine if the insureds health has changed in the intervening years, and if so, to what degree and what effect it will have on the insureds life expectancy.
This requires the life settlement underwriter to go beyond the risk acceptance limits typically used in life insurance underwriting. In identifying an appropriate rate class, life insurance underwriters typically look to protect against premature death. But where life settlements are concerned, the underwriter looks to protect from unanticipated longevity.
The methods used to accomplish both goals are similar, but the tools are different.
